VAT on electricity cut to 0% from October 2026: What businesses, charities and households need to know

When VAT was first introduced in 1973, supplies of electricity were subject to 0% VAT, i.e. they were zero rated.  In 1990 that began to change, with supplies for commercial/non-qualifying use becoming standard rated. In 1994 ‘qualifying’ supplies – i.e. domestic, relevant residential and charitable non-business use – also attracted VAT, although at the reduced rate. That treatment has continued. Until now.

Over 30 years on and we are back to the beginning, in so far as domestic and other qualifying use is concerned. The new Prime Minster has sparked into action announcing that VAT on domestic electricity supplies will be reduced from 5% to 0% from 1 October 2026.

The VAT cut is expected to save the average household around £45 a year, with suppliers expected to pass the reduction on to all customers, including those on fixed-rate tariffs.

Who will benefit?

While the Government’s announcement has focused on domestic electricity bills, not other fuel and power, the VAT reduction is expected to apply to more than just domestic electricity supplies and will also apply to others that currently qualify for the reduced rate of VAT.

Although we are yet to see the detail, the measure is likely to include a zero rate for:

• Electricity for domestic use, including homes, residential accommodation, care homes, hospices, and similar establishments, 
• Electricity for charity non-business use, 
• De minimis supplies of electricity where consumption falls below the prescribed threshold; and
• Mixed-use supplies of electricity where at least 60% of consumption relates to a qualifying use as above.

As a result, the changes could benefit a wide range of organisations, including charities (which includes academies), residential care providers, housing associations, private schools with boarding houses, NHS Trusts with staff accommodation, other providers of residential accommodation, and businesses that qualify under the de minimis rules.

What should organisations do now?

Charities, residential care providers, housing associations, and businesses currently benefiting from reduced rate treatment should:

• Review whether their electricity supplies qualify for VAT relief. 
• Ensure any residential, charitable or de minimis certification/declarations are up to date. 
• Check that suppliers apply the correct VAT rate from 1 October 2026.

Don’t overlook your VAT declaration, i.e. certificate to suppliers. Many organisations currently benefit from the reduced rate because they have provided their energy supplier with a certificate confirming that the supply qualifies for domestic, or charity non-business use, for example. If the new zero rate follows a similar framework, suppliers are likely to continue relying on customer declarations when deciding which VAT rate to apply. While this can help secure the correct treatment, it also shifts much of the responsibility onto the customer. Before signing or renewing any declaration, organisations should take the opportunity to review and confirm that they genuinely qualify, particularly if there is a need for an apportionment of the supply for some qualifying use, as HMRC will tend to look to the customer of the supply rather than the supplier for any undercharged VAT, if the relief has been claimed incorrectly.

Need advice?

The VAT treatment of electricity can be complex, particularly where supplies relate to residential accommodation, relevant charitable use, mixed-use premises or de minimis consumption levels.

It is also worth remembering that the Government’s announcement relates specifically to qualifying electricity supplies. Many organisations receive other supplies of fuel and power, such as gas, heating, steam, or hot water, which may continue to qualify for the reduced rate under the existing rules. Depending on how the changes are implemented, some utilities could be subject to 0% VAT, while others remain subject to the 5% reduced rate and others could be subject to 20% VAT.

Now is an ideal opportunity to review whether your organisation is being charged the correct rate of VAT on all fuel and power supplies. In our experience, many organisations are unaware that they may qualify for zero rated or reduced rated supplies and could therefore be paying more VAT than necessary. Equally, we occasionally see the opposite situation, where VAT has been charged at a lower rate than the legislation allows, creating a potential exposure for the customer if HMRC later challenges the treatment. This exposure could widen where the VAT rate reduces from 5% to 0%.

Our VAT specialists can help determine the correct VAT liability of your utility supplies, review any declarations or certificates provided to suppliers, and identify whether VAT has been incorrectly applied. Where VAT has been overcharged, we can assist in approaching utility providers to secure refunds and ensure the correct treatment is applied going forward. Where underpaid VAT has been identified, we can help quantify the risk and put matters right before it becomes a wider issue.

If you would like to discuss how the proposed changes may affect your organisation or review the VAT treatment currently being applied by your energy suppliers, please contact our VAT team.